Professional Documents
Culture Documents
org -
1. Prologue
2. #2: @RBI fix accountability in monetary policy making
3. Monetary Policy Committee
1. MPC Decision by Majority
2. MPC: Accountability for #EPICFails
3. MPC: Summary
4. #3: @Government give Cover fire to RBI
1. #: MNREGA:
2. #: MSP
3. #: Fiscal Deficit
4. #: Loan Waiver
5. Urjit Patel: Misc recommendations
6. Mock Questions
Prologue
RBI had formed a Committee under Dy. Governor Urjit Patel to strengthen monetary policy framework.
Committee gave three major recommendations:
1. @RBI Target inflation (4% CPI; 2% band). Already covered in previous article click me.
2. @RBI fix accountability (discussed in this article)
3. @Government: help RBI fight inflation (in this article)
The outsider members will have the right to assess all data/files/records in RBI office.But he
cannot hold office of profit under the government.
Mohan Meaning?
To put this in crude words: he should not be on the payroll of the government. for example: IAS
Urjit
officers, bureaucrats, even certain bodies / corporations funded by the government.
Mohan But why?
Government may try to influence RBIs decision making via such member- because his bread n
Urjit
butter depends on that job.
Urjit
In all the advanced economies, monetary policy is made by a Committee of independent memberseven in China, government directly doesnt interfere with its officers/representatives.
Exceptions where government side is represented in Monetary policy Committee =Colombia,
Philippines.
Conflict of Interest
Secondly, such outside member must not involve in any activity that has conflict of interest with
RBI.
Mohan Meaning?
Urjit
Urjit
Consider HSBC, Morgant Stanley, JP Morgan Chase etc giants. They have license to
operate as Primary dealers in India. Meaning they can directly buy and sell government
securities. So, if monetary policy Committee member also provides consultancy services
to such firms= there is conflict of interest.
What if he leaks information to that company, e.g. RBI will start Open market Operation in
week OR RBI is set to decide Repo rate @xx%.
Those primary dealers could make windfall profits from such insider tips.
Urjit
Noone will be allowed to abstain from the voting. (unlike the CBI fearing parties in Rajya
Sabha).
All five members must vote on each and every issue brought on table.
Since 5 is an odd number, there is no chance of tie.
Mohan Ya but what if one member is absent? Then four members left= 2 vs 2 tie possible!
Urjit In that case Rajan (Chairman) will give the casting vote to break the tie.
Mohan But what if Rajan himself is absent? And there is 2vs2 tie?
Urjit Then Vice Chairman of the Committee (Dy.Governor) will give the casting vote to break the tie.
Mohan But what if He is also absent?
if both chairman and VC are absent, then common sense suggests we should postpone the
Urjit
meeting!
Ok one last doubt: you told there are five people in MPC Committee: three insiders (Rajan, Dy
Governor and one member) vs two outsiders (external members).
Mohan
Urjit
What if one of the outsider member always gives dissenting vote.Ultimately, Rajan bhais
goonda-log beats him to pulp to make sure he remains absent in the meeting.
and then Rajan bhai uses his own casting vote to decide policy according to his own
whims and fancies!
How will you maintain accountability in that case? Solve it for [Ethics] GS4.
Im not going to dignify that stupid question/case study with an answer. Lets move to next topic:
MPC: Summary
Total five persons.
1. RBI governor as chairman
2. RBI dy.governor as Vice chairman
Members:
STRUCTURE
DECISION
MAKING
TRANSPARENCY
^~130 words.
Moving to the third main recommendation:
#: MNREGA:
Money increased in Juntaas hand? Yes
Productive infrastructure/assets increased =Hardly. (Most of those kuccha roads and ponds get
washed away in first rain.)
So in a way, more money in publics hand, without corresponding rise in some physical
goods/infrastructure/services. => leads to inflation.
Additionally, MNREGA=>less poors migrating to rich states to work as farm laborers=> the farmers
in those states have to arrange local laborers @higher wages=> food inflation.
+ lot of this money chowed down by Sarpanch, Patwari and Tehsildaar=> they give it local money
lender, who in
turn loans it to farmers @36% interest rate. Rajan has no control over this. His monetary policy fails
to control this.
#: MSP
In recent years, government kept increasing minimum support prices (MSP) of foodgrains (To
benefit farmers/vote bank politics.)
But APMC merchants are not ready to buy grains @such high price.
So, Farmers bring the grain to FCI (to sell it @Minimum support price declared by the government.)
FCI buys it, but FCI doesnt have sufficient godowns= grains rotten @railway stations and eaten
away by birds, rats, dogs and cows.
Money increased in farmerss hand? Yes
Products/Goods/services increased in the economy? Nope. in fact foodgrain destroyed=> less
commodities/products/breads/biscuits.
Result= inflation.
+ even if this reaches to PDS shop, those shopkeeper themselves involved in hoarding and black
marketeering. So, inflation continues.
Ill-gotten money gets reinvested in gold, real estate etc (because black-marketer cannot deposit in
banks- else Income tax walla will track him down through KYC form.)
Again, Rajan doesnt have control over this, so his monetary policy will remain ineffective.
#: Fiscal Deficit
Deficit
Budget deficit
Fiscal deficit
Primary deficit
Revenue Deficit
Effective Revenue
deficit
formula
Total expenditure Total receipts
Budget deficit + Borrowing.
(Total Expenditure Total Receipts) + Borrowing
(Total expenditure + borrowing) [Revenue Receipts + Capital Receipt]
Total expenditure [Revenue receipts + (Capital Receipts non debt type)]
Total Expenditure [Revenue receipts + (Recovery of loans +Other
receipts)]
Fiscal deficit interest payment (on previous loans)
Revenue Expenditure Revenue receipt
Revenue deficit grant for creation of capital assets
#: Loan Waiver
2008: Government announced debt waiver scheme for farmer. Accordingly, government paid >60k
crore rupees to the banks, on farmers behalf to settle their loans. This hurts in three ways
1. Fiscal deficit increased=> more problem as we saw above.
Chindu
Waah Urjit bhai waah. Youve given some radical recommendations.Lejin Hum nahi sudharenge (well
not reform and continue to give truckload of subsidies and freebies before election.) Just observe:
1. Weve increased number of subsidized LPG cylinders from 9 to 12 => subsidy burden increased by
5000 crore.
2. Previously 6th Pay commissions recommendation cost us Rs.20000 crores. Now Weve formed
7th Pay commission under Justice Mathuor. You can be damn sure itll cost more than Rs.20000
crores.
3. And before the Model code of conduct is announced, we may launch a few more schemes, freebies
and highest MSP for farmer.
Rajan
Then I better just run away to Nepal, Dubai or Bangkok than try to fix the inflation mess through
monetary policy.
Mock Questions
1. Find correct statements
a. Primary deficit cannot be higher than fiscal deficit
b. Primary deficit is obtained by deducting interest rates from Revenue deficit
c. Both A and B
d. Neither A nor B
2. Find Incorrect statements
a. Fiscal deficit cannot be lower than budget deficit
b. Fiscal deficit cannot be lower than Revenue deficit
c. Both A and B
d. Neither A nor B
3. Effective revenue deficit means
a. Revenue deficit + Interest payment
b. Revenue deficit Borrowing
c. Revenue deficit + grant for creation of capital assets
d. Revenue deficit grant for creation of capital assets
4. RBI governor is__
a. Selected by a panel consisting of Finance minister, commerce minister and the leader of
opposition in Lok Sabha
b. Answerable to the parliaments standing Committee on finance.
c. Both A and B
d. Neither A nor B
5. (A) In the recent years, RBIs monetary policy has failed to contain inflation. (R) High level of
subsidies and fiscal deficit reduce the impact of monetary policy on ground level.
a. Both the statements are individually true and Statement R is the correct explanation of
Statement A
b. Both the statements are individually true but Statement R is not the correct explanation of
Statement A
c. Statement A is true but Statement R is false.
d. Statement A is false but Statement R is true.
Q6. Urjit Patel Committee has recommended setting up a monetary policy Committee. Which of the
following statements are correct in that regard:
1. Members will be chosen by a panel of RBI governor, Finance minister, commerce minister and the
minister for corporate affairs.
2. Their salaries will be charged upon the consolidated fund of India.
3. They cannot be removed from office without a proved misbehavior and voting in both houses on
such motion.
Answer choices
a.
b.
c.
d.
Only 1 and 2
Only 2 and 3
Only 1 and 3
None.
Descriptive
(GS2-regulatory bodies)
What are the recommendations made by Urjit Patel Committee, to bring more accountability
in the monetary policy formation in India? (5m | 100 words)
Write a note on the salient recommendations by Urjit Patel Committee to strengthen the
monetary policy framework in India (10m | 200 words)
(GS3) Examine the role of Minimum support prices and farm subsidies as the Factors responsible
for inflation in India. Do you agree with Urjit Patel Committees recommendations for removal of
such administered prices and subsidies? Justify your stand. (10m | 200 words)
Interview
1. Urjit Patel Committee has recommended RBI to keep repo rate higher than CPI. This type of
hawkish policy to combat inflation, will hurt the growth momentum. Do you Agree? Yes/No/Why?
2. Urjit Patel Committee says bring down fiscal deficit to 3% of GDP by 2016. Do you think this is even
plausible? Yes/no/why? If youre made by the finance minister of India, how will you address the
problem of fiscal deficit?
3. In the recent years, RBIs monetary policy has failed to put much impact on inflation. If youre made
the governor of RBI, how will you address this problem?
4. Suppose youre the Finance minister of India, and have to pickup the next governor of RBI. There
are two candidates- both man of high integrity and impeccable career record- one is an IAS, who
has long served in finance, commerce and corporate affairs ministries. And the second candidate
is an IIM graduate with long experience of teaching economics at prestigious institutions abroad,
and working with IMF but he holds a US Green card. Which one will you select and why?
Visit Mrunal.org/Economy For more on Money, Banking, Finance, Taxation and Economy.